College Disrupted: Students Face High Costs and Pandemic Impact

Even in normal times, it can be challenging for families to cover college expenses without borrowing money and/or risking their own retirement security. For the 2019-2020 academic year, the cost of in-state tuition, fees, room, and board at a four-year public college averaged $21,950, and the total for a private college approached $50,000 (1).

Sadly, the college world is not immune from the health fears and financial pain inflicted by the coronavirus pandemic. More students might choose schools that are less expensive and/or closer to home, take a year off, or forgo college altogether. The American Council on Education predicted a 15% decline in college enrollment nationwide for the next academic year (2).

With the financial futures of students and supportive parents at stake, it is more important than ever for families to make informed college decisions.

Reopening plans

As of August 5, 2020, about 29% of the nearly 3,000 institutions tracked by The Chronicle of Higher Education had announced plans for an online fall semester, 23.5% were planning to hold classes primarily or fully in person, 16% were proposing various hybrid models of in-person classes and remote learning, and the remainder were still undecided (3).

To reduce campus density and make room for social distancing in classrooms and residence halls, many colleges are inviting 40% to 60% of students back to campus (prioritizing freshman or seniors, certain majors, programs with clinical requirements, and students with unsafe home situations, for example) while expanding and improving remote teaching capabilities for students studying at home (4). Some colleges have backtracked on earlier plans to reopen due to a surge of the virus, and more could follow suit as events unfold (5).

A new landscape

Students who live on campus or attend classes in person are likely to find strict rules and restrictions regarding safety practices (physical distancing, face coverings, virus testing) and changes in many facets of campus life, including living situations, food options, class settings, social gatherings, and popular extracurricular programs such as arts and athletics.

Acknowledging that students are not getting the college experience they wanted and are now more price sensitive, many schools are freezing tuition, and others are offering discounts, increasing scholarships, or allowing students to defer payments (6). In anticipation of $23 billion in revenue losses, colleges nationwide have also had to lay off employees, reduce salaries, eliminate programs, and make other budget cuts (7-8).

In mid-March, Moody’s Investors Service downgraded the outlook for higher education from stable to negative, citing reduced enrollment. Institutions with large endowments and/or strong cash flows are better positioned to withstand the crisis, but lost tuition poses a bigger threat to smaller colleges (9).

Shopping for schools

High school students who are involved in the planning and application process might be lucky to enter college after the worst of the health crisis is over. Still, more economic hardship means that cost could play a greater role in school selection.

Many students don’t pay published tuition prices, and financial aid packages differ from school to school. After identifying schools that might be a fit, families can use net price calculators to compare how generous different colleges might be, based on the household’s financial situation and the student’s academic profile.

Before choosing a school, students should understand how much they might have to borrow and what the monthly payment would be after college. It’s also important to take a hard look at earning potential when choosing an academic program. Those who plan to enter lower-paying fields may fare better if they keep costs down and borrowing to a minimum.

Seeking financial aid

To receive grants and/or loans, students must complete the Department of Education’s Free Application for Federal Student Aid (FAFSA) and apply for aid according to the college’s instructions as early as possible. Higher-earning families should also fill out the FAFSA because they may qualify for more need-based aid than they might expect, and some schools may require a completed FAFSA for merit-based scholarships.

College students with parents who have lost a job or earned less income than normal this year due to COVID-19 may want to appeal for a revised aid package, if not for fall then for spring. The financial aid administrator may be able to reduce the loan component of a student’s aid package and/or increase the scholarship, grant, or work-study component.

Will college pay off?

The average college graduate earns $78,000 per year, compared with about $45,000 for the average worker with a high school diploma. The wages of workers without a college degree tend to fall more during recessions, and they are more likely to be unemployed, as seen during the pandemic (10).

A 2019 Federal Reserve analysis of the cost (four years of tuition and lost wages) and the benefits (higher lifetime earnings) concluded that a college degree is a sound investment for most people; the average rate of return for a bachelor’s degree is about 14% (11).

When Fed economists adjusted this analysis to account for the 2020 pandemic, the return on a college degree rose to 17% (under the assumption that many workers with a high school diploma would be unemployed for a year). For a student who takes a gap year, the estimated return dropped to 13%. The $90,000 cost of a delay includes one year’s worth of post-graduation earnings and slower growth in wages over a lifetime (12).

Remote learning may not be a perfect substitute for in-person interactions and relationships, especially for students enrolled at expensive institutions. Still, motivated students can grow intellectually and work toward a degree that could be valuable in terms of future earnings and social mobility.

Many colleges may be able to utilize their investments in technology and online curriculums long after the pandemic passes, providing future undergraduates with more opportunities to earn an affordable college degree remotely.

If you would like to review your current investment portfolio or discuss any college planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

(1) College Board, 2019

(2)(7) American Council on Education, 2020

(3) The Chronicle of Higher Education, August 5, 2020

(4)(9) The New York Times, July 7, 2020, and May 12, 2020

(5) NPR.com, July 22, 2020

(6)(8) Inside Higher Ed, April 27, 2020, and June 29, 2020

(10)(11)(12) Federal Reserve Bank of New York, 2019-2020

IRS Clarifies COVID-19 Relief Measures for Retirement Savers

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 ushered in several measures designed to help IRA and retirement plan account holders cope with financial fallout from the virus. The rules were welcome relief to many people, but left questions about the details unanswered. In late June, the IRS released Notices 2020-50 and 2020-51, which shed light on these outstanding issues.

Required minimum distributions (RMDs)

One CARES Act measure suspends 2020 RMDs from defined contribution plans and IRAs. Account holders who prefer to forgo RMDs from their accounts, or to withdraw a lower amount than required, may do so. The waiver also applies to account holders who turned 70½ in 2019 and who would have had to take their first RMD by April 1, 2020, as well as beneficiaries of inherited retirement accounts.

One of the questions left unanswered by the legislation was: “What if an account holder took an RMD in 2020 before passage of the CARES Act and missed the 60-day window to roll the money back into a qualified account?”

In April, IRS Notice 2020-23 extended the 60-day rollover rule for those who took a distribution on or after February 1, 2020, allowing participants to roll their money back into an eligible retirement account by July 15, 2020. This seemingly left account owners who had taken RMDs in January without recourse. However, IRS Notice 2020-51 rectified the situation by stating that all 2020 RMDs — even those received as early as January 1 — may be rolled back into a qualified account by August 31, 2020. Moreover, such a rollover would not be subject to the one-rollover-per-year rule.

This ability to undo a 2020 RMD also applies to beneficiaries who would otherwise be ineligible to conduct a rollover. (However, in their case, the money must be rolled back into the original account.)

This provision does not apply to defined benefit (pension) plans.

Coronavirus withdrawals and loans

Another measure in the CARES Act allows qualified IRA and retirement plan account holders affected by the virus to withdraw up to $100,000 of their vested balance without having to pay the 10% early-withdrawal penalty (25% for certain SIMPLE IRAs). They may choose to spread the income from these “coronavirus-related distributions,” or CRDs, ratably over a period of three years to help manage the associated income tax liability. They may also recontribute any portion of the distribution that would otherwise be eligible for a tax-free rollover to an eligible retirement plan over a three-year period, and the amounts repaid would be treated as a trustee-to-trustee transfer, avoiding tax consequences.1

In addition, the CARES Act included a provision stating that between March 27 and September 22, 2020, qualified coronavirus-affected retirement plan participants may also be able to borrow up to 100% of their vested account balance or $100,000, whichever is less. In addition, any qualified participant with an outstanding loan who has payments due between March 27, 2020, and December 31, 2020, may be able to delay those payments by one year.

IRS Notice 2020-50

To be eligible for coronavirus-related provisions in the CARES Act, “qualified individuals” were originally defined as IRA owners and retirement plan participants who were diagnosed with the virus, those whose spouses or dependents were diagnosed with the illness, and account holders who experienced certain adverse financial consequences as a result of the pandemic. IRS Notice 2020-50 expanded that definition to also include an account holder, spouse, or household member who has experienced pandemic-related financial setbacks as a result of:

  • A quarantine, furlough, layoff, or reduced work hours
  • An inability to work due to lack of childcare
  • Owning a business forced to close or reduce hours
  • Reduced pay or self-employment income
  • A rescinded job offer or delayed start date for a job

These expanded eligibility provisions enhance the opportunities for account holders to take a CRD.

The Notice clarifies that qualified individuals can take multiple distributions totaling no more than $100,000 regardless of actual need. In other words, the total amount withdrawn does not need to match the amount of the adverse financial consequence. (Retirement investors should consider the pros and cons carefully before withdrawing money.)

It also states that individuals will report a coronavirus-related distribution (or distributions) on their federal income tax returns and on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. Individuals can also use this form to report any recontributed amounts. As noted above, individuals can choose to either spread the income ratably over three years or report it all in year one; however, once a decision is indicated on the initial tax filing, it cannot be changed. Note that if multiple CRDs occur in 2020, they must all be treated consistently — either ratably over three years or reported all at once.

Taxpayers who recontribute amounts after paying taxes on reported CRD income will have to file amended returns and Form 8915-E to recoup the payments. Taxpayers who elect to report income over three years and then recontribute amounts that exceed the amount required to be reported in any given year may “carry forward” the excess contributions — i.e., they may report the additional amounts on the next year’s tax return.

The Notice also clarifies that amounts can be recontributed at any point during the three-year period beginning the day after the day of a CRD. Amounts recontributed will not apply to the one-rollover-per-year rule.

Regarding plan loans, participants who delay their payments as permitted by the CARES Act should understand that once the delay period ends, their loan payments will be recalculated to include interest that accrued over the time frame and reamortized over a period up to one year longer than the original term of the loan.

Retirement plans are not required to adopt the loan and withdrawal provisions, so check with your plan administrator to see which options might apply to you. However, qualified individuals whose plans do not specifically adopt the CARES Act provisions may choose to categorize certain other types of distributions — including distributions that in any other year would be considered RMDs — as CRDs on their tax returns, provided the total amount does not exceed $100,000.

For more information, review IRS Notices 2020-50 and 2020-51, or talk to us.

1Qualified beneficiaries may also treat a distribution as a CRD; however, nonspousal beneficiaries are not permitted to recontribute funds, as they would not otherwise be eligible for a rollover.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

2020: Not Your Average Election Year

If you decided to take a long nap on New Year’s Eve and just woke up today, looked at your account statements, you might have yawned at how unchanged and boring the market must have been. You’d probably think, “on average, the market has been unchanged.”

But that’s the problem of averages when it comes to the stock market — they can wall-paper over a lot of painful experiences, like the tech bubble of 1999-2000, and the housing bubble of 2006-2007.

Considering the health catastrophe created by COVID-19, the strong rebound in stocks since the late-March low is astounding, especially given the deep economic damage. But given that the stock market is a forward-looking discount mechanism, it suggests that the collective wisdom of investors is more optimistic than the evidence that we hear and read about every day.

Stock markets continue to express little concern about the many uncertainties in this environment. Stock market valuations have met or exceeded their pre-crisis levels by most measures and continue to expand despite the major ongoing risks. Existing home sales in June of 4.7 million exceeded a record level on the back of falling interest rates, even as the number of unemployment claims ticked up last week for the first time in four months.

Federal Reserve support, rock bottom interest rates, the re-opening trade, and stronger economic data have helped. I also believe investors are looking past this year’s hit to corporate profits and are expecting an upturn in 2021.

The jump in daily COVID cases has created some renewed volatility, and it bears watching, but it has yet to knock the bulls off course. New all-time highs in the stock market in the weeks ahead would not surprise me one bit (the NASDAQ index has already done it). Even more surprising, it’s entirely possible that we’ve embarked on a new bull market.

While we are cautiously optimistic and giving this market the benefit of the doubt, we are maintaining our defensive allocation, primarily due to the persistent level of exuberance in the markets and resulting current overvaluation, as well as the uncertainty around possible rollbacks in re-openings.

Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds. Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach. It may take time for some businesses to fully recover. Some never will.

Last month I opined, “I don’t expect a return to a pre-Covid jobless rate anytime soon. But investors are betting that an economic bottom is in sight.”

Try to look past continued volatility. With elections coming up this year, I expect more wacky market moves to go along with the typical wacky political moves we always see in a presidential election year. Regardless, based on recent economic reports, I think we hit bottom in April.

Those worried about a return to the March lows currently don’t have much evidence in terms of stock market action to support their worries. With so much money on the sidelines, it seems that every little dip is getting bought by those left behind in the panic.

If you liken the February-March stock market crash to an earthquake, then sure, you may feel some tremors and aftershocks for months, but the likelihood of another earthquake within a short period of time is highly improbable.

What to Do

None of us expected an economic upheaval spawned by a health crisis as the year began. But it pays to discuss some of the lessons and takeaways from the COVID-19 crisis.  And as I discuss them, you’ll probably recognize some of the themes (yes I do repeat myself frequently, like a nagging parent). Let’s not forget that the fundamentals—the core financial precepts—are always the building blocks of any credible financial plan.

1. Money at the end of your month

Saving for an emergency cannot be underestimated. Six to nine months of spending needs is optimal. But there is an added benefit—financial peace of mind.

It’s reflected in the proverb “The borrower is servant to the lender.” It’s not that I would counsel against a mortgage for a home or a reasonable loan for a car. But accumulation of wants (not needs) with (credit card) debt doesn’t bring contentment.

Instead, it brings stress. I have seen it over and over. You want money at the end of your month, not month at the end of your money.

A financial cushion eliminates one of life’s worries.

2. Wants vs. needs

Many of us have learned to do without certain things during quarantine. Whether we wanted to or not, we were forced to cut back on certain items.

Ask yourself this question, “As businesses re-open, are there things I can do without? Can I continue to cut back and still maintain my lifestyle?”

Many of our entertainment options have been curtailed. As we emerge from our homes and businesses reopen, are there items that can be trimmed from the budget?

It’s not a cold turkey approach, i.e. no more eating out, sporting events, travel or theater. But can we reduce expenditures on some items without sacrificing our overall lifestyle?

3. Diversification and tolerance for risk

We’ve just witnessed an unusual amount of stock market volatility. Calling it a roller coaster does not fully capture the experience (and most amusement parks are still shuttered!)

The major indexes have erased much of their losses. Yet, how did you fare emotionally when stocks took a beating? Now is the time to reevaluate your tolerance for risk. We’d be happy to assist and make any adjustments as they relate to your longer-term financial goals.

4. Expecting the unexpected

From its March 2009 low to the February 2020 high, the bull market ran for over 10 years (measured by the S&P 500 Index). We know bear markets are inevitable, but I recognize that the onset of a steep decline may be unnerving.

Nonetheless, a well-diversified portfolio of stocks has historically had an upside bias. That upside bias is incorporated into the recommendations we make, even as our recommendations are tailored to your individual circumstances and goals.

Further, a mix of fixed income and contra-funds helped cushion the decline. While we monitor events and the markets over a shorter-term period, let’s be careful not to take our eyes off your longer-term goals.

Be proactive, not reactive

The ideas above are a broad overview and individual circumstances may vary.

Taking inventory is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a much better position than you realized. As always, we are here to help.

I hope you’ve found this review to be helpful and educational.

I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced. We have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

What’s Going on in the Markets June 7, 2020

Over the past week, the stocks of American Airlines, United Airlines and Delta Airlines were up 77%, 51% and 35% respectively. In addition, the stocks of Norwegian Cruises, Carnival Cruises and Royal Caribbean Cruises were up 43%, 37%, and 34% respectively.

But none was more bizarre than the stock of Hertz Car Rental, which was up a whopping 157% on the week. Now it’s not unusual for a cheap stock trading for $1.00 a share to double or triple in a week. But it is unusual when the company has already declared bankruptcy, meaning that stockholders will likely receive nothing in the reorganization.

In what I can only describe as a bit of overexuberance in a world where many don’t plan to get on an airplane in the next 12 months, and others who say they’ll never step foot on a cruise ship in their lifetimes again, can I say that the recent rally is getting a little “bubblelicious”?

That’s all to say that I cannot remember a time when I’ve seen such a widespread disparity between what is happening in the economy and what is happening in the stock market.

Let’s take a few moments to briefly outline the situation using hard data.

  • The unemployment rate soared to a post-depression high of 14.7% in April, while the survey of businesses by the U.S. Bureau of Labor Statistics revealed a loss of 20.5 million jobs in April, the worst monthly reading since records began in 1939.
  • In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.
  • Then on Friday we got the May Jobs report and we were surprised that the economy had created 2.5 million jobs and the unemployment rate had actually declined to 13.3%. While 13.3% unemployment is a “depression-like” number, it was far better than numbers projected by economists: a loss of 7.5 million jobs and a 20% unemployment rate. To paraphrase Yogi Berra: “forecasting is hard, especially when it’s about the future”.
  • April’s 11.2% drop in industrial production, a metric the Federal Reserve has tracked since 1919 – is the biggest monthly decline on record. Furthermore, consumer spending in April fell 13.6%, the biggest decline ever recorded (U.S. BEA, data back to 1959).
  • The Institute for Supply Management’s (ISM) Manufacturing Index and the ISM Services Index both showed a slight improvement in May; however, both segments remain deep in contraction territory.
  • Record layoffs continue, with the number of first-time claims for unemployment insurance topping 40 million over a 10-week period ending May 23. Put another way, nearly one in four working Americans have experienced a job loss.

If there is any good news, it is that the number of first-time filings has been declining, and the number of individuals who re-certify on a regular basis in order to continue receiving jobless benefits is about half the number of first-time filings.

This would suggest that the economic injury disaster loans and payroll protection program loans are kicking in, and re-openings are encouraging businesses to recall furloughed workers.

Let’s Back Up Again for a Moment

  • In April, in just a three-week period, the number of first-time claims for jobless benefits totaled an astounding 17 million. For perspective, during the 18-month-long 2007-2009 recession…first-time claims totaled 9.6 million.
  • Yet the Dow Jones Industrial Average added 2,107 points over the three Thursdays when the massive number of new claims were released.
  • Since then (April 9), the Dow has added 3,600 points, or 15.0%. It is up 49% since its near-term March 23 bottom.
  • The broader-based S&P 500 Index eclipsed 3,000 by the end of May and has rebounded nearly 46% from its March 23 low to near 3,200.
  • Meanwhile the tech-heavy NASDAQ Composite has added 48%, is back above 9,800, and has already surpassed its all-time high.

Simply put, economic activity is falling with depression-like speed, but the major averages are in the midst of an historic rally.

Here’s one more piece of performance data:

  • During the financial crisis, the S&P 500 Index lost nearly 57% from its October 2007 peak to the bottom in March 2009. This year, in about one month, the S&P 500 Index shed 34% before hitting a near-term bottom on March 23.

The adage “stocks climb a wall of worry” has never been more appropriate amid economic devastation and an outlook that remains incredibly murky.

A Closer Look at the Wall Street/Main Street Disconnect

A combination of factors has fueled the rally since late March.

The response by the Federal Reserve has far outpaced its 2008 response, which has lent a tremendous amount of support to stocks. The same can be said of government fiscal stimulus.

Investors are also keeping close tabs on state re-openings, which will re-employ furloughed workers, help stabilize the economy, and set the stage for a possible economic rebound later in the summer. Talk of possible vaccines has also helped.

You see, investors don’t simply look at today’s data, which in many cases is backward-looking. Instead, they are forward-looking as they attempt to price in economic activity, the level of interest rates, corporate profits, and more over the next 612 months.

An Approaching Dawn

If we look at what is called “high-frequency economic data” (daily or weekly reports), we are starting to see signs of stability.

Daily gasoline usage has rebounded (Energy Information Administration), daily travel through TSA checkpoints is up, hotel occupancy is off the bottom, and the same can be said of weekly box office receipts (Box Office Mojo).

In addition, the weekly U.S. MBA’s Purchase Index (home loan applications) registered its fifth-best reading over the last year (as of May 22), suggesting that low-interest rates and some confidence that the U.S. economy is set to recover are lending support to housing.

Of course, these are highly unconventional measures of economic activity and are industry-specific. Outside of the Purchase Index, each remains well below previous highs, but the turnaround suggests we may be seeing some light at the end of a very dark tunnel.

Collective Wisdom

Any given level of a major stock market index represents the collective wisdom of tens of millions of stock market investors. It is not simply an opinion, but an opinion with money behind it. That’s an opinion worth listening to.

When stocks were in a free fall in March, investors were anticipating a devastating blow to the economy. Tragically, the data did not disappoint.

But has the rally been too much, too quickly?

Even in the best of times, economic forecasting can be difficult (refer to earlier Yogi Berra quote). Today, the outlook is clouded with a much greater degree of uncertainty.

  1. Will the virus lay down over the summer?
  2. How will re-openings proceed?
  3. How quickly can a readily available vaccine and treatment be developed?
  4. What might happen to COVID-19 next fall and winter?
  5. How quickly will consumers venture back in public and resume prior spending patterns?

These are difficult questions to answer.

I don’t expect a return to a pre-COVID jobless rate anytime soon. But investors are betting that an economic bottom is in sight or has already occurred.

I understand the uncertainty facing all of us and I don’t underestimate the enormous amount of work that has to be done or the difficulties we’ll encounter in getting back to “normal”. We are grappling with an economic and a health care crisis, not to mention recent civil unrest. It’s a combination none of us have ever faced.

A New Bull Market or the Most Epic of all Bear Market Rallies?

For our clients’ portfolios, I know that I will spend years analyzing the last few months and scrutinizing our moves. I’m pleased that we entered 2020 with a defensive stance that served us well. I’m also pleased that we followed our rules in further reducing portfolio risk and increasing hedges as we saw fit as the decline kicked into high gear. I’m very pleased that we held firm with our core holdings, never wavering from our belief that our core assets would ultimately be just fine, dividends would continue to accrue and that the foundation of our portfolios remained intact.

As we moved through the crash methodically with a steady hand and calm head,  I’m also pleased that not a single client panicked, and those that stuck with their investment plans and did not decide to tinker with their portfolio risk “on the fly” fared the best among our clients. Those that paid attention to the media (who regularly try their best to scare us witless), and who insisted on reducing their risk near the bottom and not follow their own investment plan still fared OK but cost their portfolios dearly. 

So I guess I’ll say it again: Neither they, you, or I know what’s going to happen next, no matter how smart we are. All we can do is watch the price action, put probabilities in our favor, and pay heed to risk. Ultimately, we’re in the risk management business, not the prediction business.

What I’m not as pleased about is that we didn’t more aggressively buy the panic that ensued in the market. Of course, this is easy to say in hindsight. It was my plan to do so, but the bounce proceeded too quickly and the shallow pullbacks did not allow for the necessary low-risk entries that I was planning for. While we bought some investments lightly on the way down and also on the way up, with the benefit of hindsight, we could have more aggressively reduced hedges and ramped up buying. 

I’m also not pleased that I underestimated the power of the Federal Reserve and found myself being overly moderate. Of course, the next few months could prove my current sentiment to be completely wrong and the gains quickly reverse. As it stands, it is my plan to increase our overall investment levels based on the “quality” of the next pullback.

Towards that end, if this is truly a new bull market, and the recession turns out to be one of the shortest ones on record, then the next pullback should be of the 5%-10% variety, and will give us a low-risk way to increase stock market exposure further.  If instead, this has been the “mother” of all bear market rallies, then our continued defensive stance will serve us quite well. Only time will tell.

Short-term, the market is a bit overheated, so a pullback could ensue any day now. For those who are phasing back into the market, or who need to rebalance their portfolio, it may be advantageous to wait for the pullback.

As we move forward from here, I’ll be the first to admit that I still have no idea how this all plays out into the remainder of 2020. From the coronavirus, we have now moved to national demonstrations and riots which are affecting cities all across America. In just a few months we’ll be heading directly into a presidential election. If that’s not a recipe for elevated volatility for the rest of the year, I don’t know what is.

On the investment horizon, I can tell you that this bust/ boom cycle we’ve just witnessed has solidified, more than ever, just how important it is to have a portfolio diversification not only in different asset types, but also across time-frames (i.e., short term, medium-term and long-term investments). It has solidified the idea that a client’s risk tolerance is much more important than age-based risk tolerance, and that I plan to spend more time in client meetings making sure that clients truly understand and accept their overall risk. As a firm, we’ll continue looking to do more of the things that have worked for us and less of the things that didn’t.

Bottom Line

Fueled by record amounts of stimulus in both monetary and fiscal policy, stocks have continued to move higher in spite of the ongoing economic damage. This disconnect between the economy and the stock market has confounded many analysts due to the fact that there is typically a tight link between the two. And while it’s key to understand the additional dynamics which affect the stock market, this divergence (between the economy and stock market) represents a high degree of risk which continues to warrant a defensive portfolio stance.

As always, I’m honored and humbled that you’re devoting time to read what I’m writing and/or given me the opportunity to serve as your financial planner/advisor. If you have any questions or would like to discuss any financial matters, please feel free to give me a call.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Life After COVID-19: Same As it Ever Was?

And you may find yourself
Living in a shotgun shack
And you may find yourself
In another part of the world
And you may find yourself
Behind the wheel of a large automobile
And you may find yourself in a beautiful house
With a beautiful wife
And you may ask yourself, well
How did I get here?
Same as it ever was?
Once in a Lifetime Song Lyrics by the Talking Heads

After weeks of quarantine and “stay at home” orders, we are starting to see encouraging signs of progress in our fight against the COVID-19 pandemic. While we are not out of the woods yet, our collective focus seems to be shifting to what life looks like after COVID-19.

We’re all eager to go back to some sense of “normal”, but some experts believe the COVID-19 global pandemic will cause permanent changes in our lives, our psyches, and in the normal way business is conducted in America and around the world. Will we ever go back to the way we were before the virus struck?

Same as it ever was?

Our world could change in many ways beyond our current social distancing and wearing masks in public. Companies large and small are overcoming their reluctance to allow employees to work remotely. Business travel and conferences could become more virtual and less in-person events. Schools from elementary to college have been forced to accelerate online learning capabilities that could change the future of education.

Everyone is becoming more comfortable with virtual meetings, using services like Zoom, Google Meet, GoToMeeting, Slack, and Microsoft Teams for everything from business meetings to exercise classes. Online shopping had already seen rapid growth in recent years, and with physical stores closed, that growth has exploded.

A catastrophe on the scale of the COVID-19 pandemic can also change the psyche in interesting ways. We can see this impact in the people who survived the Great Depression and the rationing during World War II. The most telling residue of those times was people living frugally for the rest of their days, right through a long period of abundance. At the very least, people will have an enhanced appreciation of things we once took for granted.

As we return to some form of “normal,” we need to ask ourselves some important questions. We should think about what our world looks like during this “Great Pause” and use that to make smart decisions about what we want it to look like in the future. Celebrating the 50th anniversary of Earth Day brought plenty of commentary about the benefits of less traffic, smog-free cities around the world, and the return of native wildlife to city streets.

Same as it ever was?

On a more personal level, can YOU take advantage of this incredible opportunity we have been “given” to think more deeply about what you want YOUR life to look like after the pandemic? Maybe jumping right back into the life you had before is not the answer. Perhaps you could make some changes that would improve your life and enable you to live more aligned with your true purpose?

Thinking about questions like these might help as you consider what your life looks like after the pandemic:
1. What brings you joy? What percentage of your time, money, and energy are you putting into people, experiences, work, etc that bring you true joy?
2. What have you truly missed during these past few months? How can you make changes that might enable you to spend more time in these activities?
3. Are there any things you’ve found you really do not need in your life? We often fill our lives up with so many activities and so much “stuff” that we constantly feel overwhelmed. Maybe some of that “stuff” is not important in the long run.
4. How can you make a real difference in the lives of others that you are close to? Maybe your perspective on this has changed during the pandemic.

While my role as a CPA & Certified Financial Planner is typically focused on the financial side of my clients’ lives, the real reason for addressing these financial issues is to help you live the life you desire. That is the true purpose of financial planning. We help you think through the financial issues, concerns, and questions that you face and assist you in making smart decisions in your financial lives. We all must make choices and trade-offs in our lives, and our role is to help you think through the financial implications of doing that. But the ultimate goal is to help you live the life you desire.

I am here to help you as we all transition to life after the pandemic. All our lives will be different going forward, maybe you can make yours a little better. There is so much that is out of our control in times like these, by focusing on the things that we CAN control we can lead a better life.

Same as it ever was?

Probably not.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Be on the Alert for Coronavirus Scams

The FTC (Federal Trade Commission) has received over 20,000 COVID-19 related complaints since January 1, 2020.

Fraudsters and scam artists are always looking for new ways to prey on consumers. Now they are using the same tactics to take advantage of consumers’ heightened financial and health concerns over the coronavirus pandemic. Federal, state, and local law enforcement have begun issuing warnings on the surge of coronavirus scams and how consumers can protect themselves. Here are some of the more prevalent coronavirus scams that consumers need to watch out for.

Schemes related to economic impact payments

The IRS recently issued a warning about various schemes related to economic impact payments that are being sent to taxpayers under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.1 The IRS warns taxpayers to be aware of scammers who:

  • Use words such as “stimulus check” or “stimulus payment” instead of the official term, “economic impact payment”
  • Ask you to “sign up” for your economic impact payment check
  • Contact you by phone, email, text or social media for verification of personal and/or banking information to receive or speed up your economic impact payment

In most cases, the IRS will deposit the economic impact payment directly into an account that taxpayers previously provided on their tax returns. If taxpayers have previously filed their taxes but not provided direct-deposit information to the IRS, they will be able to provide their banking information online at irs.gov/coronavirus. If the IRS does not have a taxpayer’s direct-deposit information, a check will be mailed to the taxpayer’s address on file with the IRS. In addition, the IRS is reminding Social Security recipients who normally don’t file taxes that no additional action or information is needed on their part to receive the $1,200 economic payment — it will be sent to them automatically.

Fraudulent treatments, vaccinations, and home test kits

The Federal Trade Commission is tracking scam artists who are attempting to sell fraudulent products that claim to treat, prevent, or diagnose COVID-19. Currently, the U.S. Food and Drug Administration (FDA) has not approved any products designed specifically to treat or prevent COVID-19.

The FDA had warned consumers in March to be wary of companies selling unauthorized coronavirus home testing kits. On April 21, 2020, the FDA authorized the first coronavirus test kit for home use. According to the FDA, the test kits will be available to consumers in most states, with a doctor’s order, in the coming weeks. You can visit fda.gov for more information.

Phishing scams

Scammers have begun using phishing scams related to the coronavirus pandemic in order to obtain personal and financial information. Phishing scams usually involve unsolicited phone calls, emails, text messages, or fake websites that pose as legitimate organizations and try to convince you to provide personal or financial information. Once scam artists obtain this information, they use it to commit identity or financial theft. Be wary of anyone claiming to be from an official organization, such as the Centers for Disease Control and Prevention or the World Health Organization, or nongovernment websites with domain names that include the words “coronavirus” or “COVID-19,” as they are likely to be malicious.

Charity fraud

Many charitable organizations are dedicated to helping those affected by COVID-19. Scammers often pose as legitimate charitable organizations in order to solicit donations from unsuspecting donors. Be wary of charities with names that are similar to more familiar or nationally known organizations. Before donating to a charity, make sure that it is legitimate and never donate cash, gift cards, or funds by wire transfer. The IRS website has a tool to assist you in checking out the status of a charitable organization at irs.gov/charities-and-nonprofits.

Protecting yourself from scams

Fortunately, there are some things you can do to protect yourself from scams, including those related to the coronavirus pandemic:

  • Don’t click on suspicious or unfamiliar links in emails, text messages, and instant messaging services.
  • Don’t answer a phone call if you don’t recognize the phone number — instead, let it go to voicemail and check later to verify the caller.
  • Never download email attachments unless you can verify that the sender is legitimate.
  • Keep device and security software up-to-date, maintain strong passwords, and use multi-factor authentication.
  • Never share personal or financial information via email, text message, or over the phone.
  • If you see a scam related to the coronavirus, be sure to report it to the FTC at ftc.gov/complaint.
If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.
1Internal Revenue Service, IR-2020-64, April 2, 2020

Who CARES about the latest Act? You should!

Last Friday, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. It is a MASSIVE bill, ($2 Trillion+) causing president Trump to remark that he had never signed anything with a “T” on it before.

What the heck? A trillion here, a trillion there–soon we’re talking about real money. I remember the days when we were tossing around billions as if it was real money. Those were the days!

The bill contains many stimulus measures and tax benefits for families, workers, small businesses and governmental agencies. In this post, I will highlight and briefly explain some of the benefits, with the understanding that I too am learning as I write, and much more guidance on certain provisions is sorely needed and likely will be forthcoming.

Direct Payments to Individuals

The most notable provision in the bill is the direct payments to taxpayers. Specifically, individuals who had up to $75,000 in adjusted gross income or AGI (essentially any gross taxable income for most people) in 2019 will receive a one-time payment of $1,200, while married couples with AGI up to $150,000 will get $2,400. Additionally, taxpayers will receive an additional $500 for each qualified child, while individuals and families with income above their respective thresholds will see their relief payments reduced by $50 for every $1,000 in AGI.

Notably, while individuals must have a work-eligible Social Security number (and not be claimed as a dependent), they don’t need to have had reportable income in 2019 and can be eligible for other income-benefit programs as well.

If you have not yet filed your 2019 return (which is now due on July 15, 2020), the IRS will estimate your payment based on your 2018 return. If the IRS has your banking information from your tax return, your payment will be directly deposited into the same account used for your tax refunds or payments. Otherwise, they’ll mail you a check. If you’re not required to file a return due to your income, the IRS may still find you to send you your payment, but forthcoming guidance on how to get your payment will help those not required to file a tax return.

Keep in mind that this payment is an advance on this year’s (2020) tax credit, so you’ll have to “true-up” this payment with your overall 2020 taxable income (and potentially receive a higher or lower credit amount). Tax planning, to reduce your overall AGI, becomes essential. For example, increasing deductible IRA or 401(k) contributions can help if you’re anywhere near the phaseout limits.

Retirement Distribution Provisions

From a retirement planning perspective, notable provisions of the CARES Act include the elimination of the 10% early withdrawal penalty on distributions from retirement accounts for so-called “Coronavirus-Related Distributions” (with the option to spread income taxation over three years, and the ability to re-contribute back to those same accounts to make up in the future). The Act also suspends the required minimum distributions (RMDs) in 2020 for a wide variety of retirement accounts (for both account owners as well as beneficiaries), as well as the ability to return current year already-made distributions to your retirement plan.

401(k) loan maximums are expanded from $50K to $100K. Obviously, I highly recommend against taking 401(k) loans or pre-retirement distributions unless you have no reasonable alternative. Remember, while the 10% penalty for early distribution is waived, you still have to pay taxes on the taxable portion of the distribution.

Unemployment Benefits Expansion

In addition to the above cash payment, unemployment benefits became much more generous. While what you get in unemployment benefits vary by state, for at least the next four months, the benefit will go up by $600 a week, and more people will qualify for unemployment benefits for a longer period of time (13 weeks longer).

There is also an expansion of benefits for those who would otherwise not normally qualify (like self-employed individuals and independent contractors). Here the rules can get a bit complicated, and more guidance for self-employed individuals is definitely needed.

Normally, the self-employed don’t qualify for unemployment benefits. However, the legislation starts a new program called the Pandemic Unemployment Assistance Program. You’ll get the $600 per week, plus half the average unemployment benefit in your state. So if you’re an independent contractor out of work, you may be in luck! Remember though that all unemployment benefits are taxable income.

College Student Provisions

The Act provides for the deferral of Federal student loan payments (principal and interest waived) through September 30, 2020. This deferral is not necessarily automatic–you should contact your loan servicer to make arrangements for deferral. If you were thinking about converting/refinancing from federal student loans to private loans, you will probably want to hold off a few months or discuss this with your financial advisor. Those of you on track for Public Service Loan Forgiveness (mostly physicians) basically get six free payments toward your 120 qualifying payments.

Other student benefits including work-study payments are now just grants (possibly non-taxable). Undergraduates who dropped out of school due to the pandemic won’t lose eligibility time for Pell Grants or subsidized loans. Arts programs, universities, and other institutions of higher learning are also getting their share of stimulus payments.

Small Business Provisions

With respect to small businesses that have been impacted by COVID-19, certain small businesses with up to 500 employees will be able to take out loans (up to $10M depending on payroll costs and other factors-see next paragraph), which will be eligible for forgiveness if used to cover payroll and other expenses (like rent and utilities), along with other ‘employee retention’ tax credit opportunities. Other benefits for businesses include a delay in the employer’s portion of Social Security payroll tax until January 1, 2021 (with half of the deferred amounts due at the end of 2021, and the other half due at the end of 2022), and more flexible Net Operating Loss rules to obtain immediate refunds, among other provisions.

As part of the benefits to small businesses, there is $10 billion set aside for “emergency grants” to cover immediate operating costs, up to $10,000 per business. However, to get it, you have to apply for a Small Business Administration (SBA) Economic Injury Disaster Loan. Each small business can borrow 2.5X average monthly payroll expenses over the last year up to $10 million, at an interest rate no higher than 4%, without any personal collateral or guarantee. Fees, principal, and interest is expected to be deferred for 6-12 months.  The amount of that loan that is used for payroll, rent, utilities, and loan interest (including mortgage) for the first 8 weeks could be forgiven tax-free, provided workers stay employed through the end of June. This is more generous than anything I’ve ever seen, at least in my lifetime.

There is another $17 billion set aside to cover payments on previously existing SBA loans. Also, there is currently a limitation on how much interest a business can deduct. The CARES Act raises it to 50% from 30%. Net operating losses from 2018-2020 can also be carried back five years, allowing you to refile your taxes for those years immediately to get a refund.

Other Miscellaneous Provisions

The legislation does a few other things, such as delaying your tax return and tax payment due date for 2019 income tax returns to July 15, 2020. First-quarter 2020 estimated income tax payments are also due July 15th, but oddly,  second-quarter 2020 estimated tax payments are still due on June 15 2020. I suspect that will be corrected in a technical corrections bill. Many states are also going to be pushing their tax due dates to coordinate with the new federal deadlines. This is changing rapidly, so check with your own state taxing authorities.

Per Section 3702 of the CARES Act, beginning in 2020, the definition of qualified medical expenses, for purposes of Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Healthcare Flexible Spending Accounts (FSAs) is expanded to include over-the-counter medications.

Qualified medical expenses for such accounts are further expanded to include amounts paid for “menstrual care products”, which are defined as “a tampon, pad, liner, cup, sponge, or similar product used by individuals with respect to menstruation or other genital tract secretions.’’

To help you support your favorite charity, you now have a new tax benefit too. If you don’t itemize your deductions, you can take up to $300 in charitable donations as an above-the-line deduction. The limitation on how much of your income that you can deduct (normally 50%) is eliminated as well, but just for 2020 (I personally don’t know anyone who gives away 50% of their income to charity, let alone more, but for this year, you can!)

If you’re one of the brave (or one who has no choice), the Act waives airplane ticket excise taxes for any trips taken during the rest of 2020.

The bill spans over 800 pages, so I can’t possibly detail all of the provisions. Therefore, I’ve only provided the highlights that I thought were most relevant for my readers (I admit that I have not read all 247 pages). Some of the provisions will require a bit of planning by individuals and small businesses, and on that, I will detail in future posts. And it’s very possible or likely that more stimulus is coming, depending on how long the effect of COVID-19 lasts, so I don’t believe that this is the last we’ve heard on this topic.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: Kitces.com

 

 

 

What’s Going on in the Markets March 28, 2020

The unprecedented market volatility continued as Friday’s downside action capped off an otherwise strong week. A robust three-day bounce of about 20% from Monday’s lows saw us give back roughly 1/4 of the weekly gains on Friday.

Still, in all, it was a great week for the bulls. The stock market, as measured by the S&P 500 index, gained about 10.25%, reclaiming about 1/3rd of the bear market losses incurred over the prior four weeks. This doesn’t mean, however, that the bulls are out of the woods and ready to run free in the fields. Bear markets rarely end after only five weeks, especially when volatility remains as high as it currently is.

So far what we’ve witnessed this week seems to be classic bear market action. Whenever the markets get so far stretched to the downside, just like a rubber band, some sort of snap-back action is to be expected. Indeed, as I’ve described in previous postings, a “wicked rip your face off rally of 20-50%” was to be expected. So yes, we could get more upside in the short term.

What we have experienced in the markets over the past five weeks is a “waterfall” decline followed by a robust bounce that gets many investors to think that the worst may be over. Most of the time, after convincing many that it’s safe to jump back in, we get a reversal of the bounce. If, in turn, the reversal plays out in traditional fashion, then the lows that were hit this past Monday will eventually be revisited and tested to see if they’ll hold.

If the lows don’t hold, then anyone buying into the bounce will be holding “losers” and will likely join the selling with anything they bought into the bounce and then some. If the lows do hold, then we will likely see a more durable (lasting) rally which may confirm that the worst of the decline is over for the intermediate-term. That may be the “safer” time to make more meaningful additions to your portfolio (but check with your investment advisor or talk to us).

The optimists are hoping that the massive fiscal and monetary stimulus will backstop stocks and prevent that retest from occurring, or that Monday’s lows will hold. The pessimists are concerned that the uncertainty of the coronavirus and its economic consequences will keep buyers on the sidelines, and that more sellers will emerge.

The response of both the Federal Reserve and the federal government has been unprecedented. The Federal Reserve outright stated this week that it’s willing to provide unlimited monetary stimulus, announcing program after program, as its balance sheet exceeds $5 trillion for the first time. That’s $5 trillion with a “T”.  Yes, $5,000,000,000,000. Pause for a moment and let that number sink in. I’ll wait.

Similarly, the $2 trillion stimulus package passed by Congress and signed by the President on Friday is more than double the $800 billion package passed in 2009 to ease the Great Recession. These efforts will dampen the economic fallout that has already begun to take place, but the full impact that will be realized is still largely unknown. I believe that more stimulus is going to be necessary.

The somewhat expected explosion in jobless claims on Thursday to a record 3.3 million (it had been averaging about 220,000-230,000 for many weeks) coupled with Friday’s sharp drop in reported Consumer Sentiment (no surprise given what’s going on in the world) indicates that the ongoing economic damage will likely be significant.

While Monday may possibly have marked an intermediate-term bottom in the market, it remains to be seen if the risks which were identified in prior posts (e.g., stock market and real estate overvaluation, low-quality corporate debt levels at a record high, yield curve inversion) will be unwound or not. The excesses that have been built up over the course of this economic cycle in terms of stock market overvaluations, inflated housing prices, and low-quality corporate debt remain in place for the most part and are clearly risks going forward. The depth and duration of this recession will be determined primarily by what happens in these key areas of vulnerability.

As we navigate through this extreme volatility, we will depend on key technical indicators to confirm whether or not Monday’s low was the bottom. Because I have serious doubts that this is the case, we used the bounce this week to reduce our overall investment allocations to stocks and exposure to riskier corporate bonds for clients. The next several weeks should provide valuable insight into whether breadth (the number of stocks going up versus the number of stocks going down) and leadership are truly stabilizing, and just how much of the economic risk is actually behind us.

While we are seeing unprecedented government support, we are also experiencing an unprecedented event that will have ramifications for every single person in the world. It would be quite foolish to believe that this monumental event can be priced into the market very quickly or easily.

At some point, there will be exceptional opportunities and they will be even better if we remain patient and wait for sustained positive price action to develop. While this extreme volatility may be good market action for very short-term stock market traders, if you’re looking to build longer-term positions, it is still too early to put any substantial capital at risk.

Nibbling a little on stocks “here and there” is OK, but I recommend that you never buy a full position at once. Always ask yourself if you’re comfortable holding the position and adding to it if it went down by another 25-40%. If you’re not comfortable doing that, then it’s too soon for you to buy because you’ll likely sell at the worst possible time.

Enjoy the weekend and please stay safe. I am here to answer any questions you might have.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

 

What’s Going on in the Markets March 23, 2020

As if we didn’t have enough adjectives to describe the week before last’s market action (unprecedented, brutal, relentless), there must be no more words to describe the terrible equity markets again last week, as a massive 4000-point drop in the Dow Jones Industrial Average (DJIA) was second to only one other over the last nine decades.

The other indexes (S&P 500, NASDAQ, Russell 2000) didn’t fare much better either, as the losses posted by the average stock and every market gauge over the last month have been staggering. I’m not going to sugar-coat it: this has been one ugly market.

Indeed, we are now in Bear Market #26 over the last 90+ years, and though the speed of this sell-off has been unparalleled, the magnitude of the decline (at least for the S&P 500 index) at present is a bit less than average. Unfortunately, that doesn’t mean it can’t get worse, but it also doesn’t mean it can’t get better.

Over the past year, as I met with clients for our annual reviews, I sheepishly explained the large cash positions and growing hedges (options sold against the portfolio and bear market funds), why I and other portfolio managers felt that there were very few good values in the market and that we were under-invested for good reasons. Heck, even the most seasoned of portfolio managers weren’t buying the best value stocks out there, and growth stocks trounced the returns on value stocks for years. Stocks like Microsoft, Apple, Facebook, Tesla, Google, Amazon, Netflix all marched higher on a seemingly daily basis, while great blue-chip value stocks like Haliburton, Schlumberger, CVS, and IBM languished in the bargain bin.

As I met with prospects over the past year, I know that I lost the business of at least two of them that had 90%+ exposure to the stock market. When I was asked what my plan would be for their portfolios, I explained that their portfolio risk far outweighed their personal risk tolerance and that I would immediately and significantly lighten up on stocks and stock funds. Needless to say, when I heard back from them, they said my approach was too conservative and decided to “go in a different direction”. I can only hope that they heeded my warning.

Day after day, week after week, month after month (after the December 2018 low), the markets would question my defensive stance, and no doubt quite a few clients were unhappy being under-invested and not making as much money as the markets were. Every market pullback from a new record high was aggressively bought up, and we had no choice but to nibble here and there, knowing that we might have to stay close to the exits on those purchases. I’ve been doing this a long time, and as I’ve said before, I’ve not witnessed such persistent selling without a robust bounce ever in my career, making unscathed exits nearly impossible.

What’s Next?

That’s enough about what’s happened. Most are interested in what’s ahead. More pain or gain?

Unfortunately, the market loathes uncertainty, and with the COVID-19 shutdown of most swaths of the nation’s economy, uncertainty is what we have in droves. Stocks trade on corporate earnings forecasts, and to-date, most companies have withdrawn their forecasts because of so many unknowns.

The stock market is what’s known in portfolio management vernacular as “a forward-looking discounting mechanism”, where the crowd sniffs out what’s to come 6-12 months in the future. Everything you know as fact today is already factored into the market, or so goes what’s known as “Modern Portfolio Theory”. When the markets are rising, they’re looking ahead 6-12 months out and forecasting what’s to come, and they must be positive on the intermediate-term future. The opposite is true as well.

What we’re witnessing in the daily “thrashings” up and down in the stock markets is the manifestation of the uncertainty as everyone tries to price stocks for “what’s next”. My best guess is that we’re still in for a rocky bottoming period with new lower lows likely ahead.

But it’s not all gloomy. While last week’s markets closed on the lows, we did see some “green shoots” to indicate that the volume of selling was waning, and there was some risk appetite returning to the markets. The small-capitalization stocks, often the riskiest of stocks, outperformed their “peers” on Friday. The volatility index did not make a new high on Friday. The number of stocks hitting their 52-week lows did not expand into the end of the week. And the number of stocks going up versus those going down got better (it’s called breadth in this business).

When Should We Buy?

I’m heartened and encouraged that, among the calls and e-mails that I received last week, the preponderance of them were asking, “when should we buy?” It’s the right question now, as we continue to navigate this volatile bear market, of when it will be safe to start buying.  In that regard, history can provide valuable guidance.

The 1987 bear market is one historical precedent that is perhaps most like today’s. Major indexes came off an equally frothy rally (as we’ve seen since December 2018) with the S&P 500 showing a strong year-to-date gain leading up to the August 25, 1987 peak. The bear market unfolded quickly after the top, losing 20% in just 38 days (this one in 2020 took 19 trading days). The bear market bottomed in December 1987 as selling pressure abated significantly and buying pressure took over. That led to one of the longest-running bull markets in history.

The Financial Crisis from 2007 to 2009 was a more protracted downturn that lasted 18 months. The lessons from that bear market include the observation that there are often enticing rallies on the way down which are called “bull traps”, such as the rebounds in March and July of 2008. Don’t get sucked into them.

As market losses deepen, it’s crucial to remember that headlines are the gloomiest near the market bottom, so paying attention to the media in March 2009 would have kept you out of the market for months, and you would have missed out on a 50% rally within just a few months. This time it’s no different — the fear mongers are out in full force with their 50% negative growth forecasts and S&P 500 index going to 1100 (down 75%) prognostications.

Stock market leadership is one of the most reliable indicators that a bear market bottom is in place. As a new bull market emerged in 2009, abating selling pressure and emerging buying pressure again provided the timeliest signal to start buying. Our client portfolios back then were defensively allocated with an invested position of about 50% (of maximum risk) at the March 9 bottom. As the selling abated and buying pressure ramped up, we quickly stepped up to 77% and then moved to 97% invested in June 2009 as other proprietary indicators confirmed the buying opportunity of a lifetime.

The important lesson is: Don’t try to second guess the bottom and don’t try to anticipate it. With no evidence of selling pressure abating and buying pressure pretty much absent currently,  I will let the weight of evidence tell me when the time is right to start increasing our invested allocation. Now is not that time; it’s far too soon to buy in my opinion (and that could change, tomorrow, next week or the week after).

Today, unfortunately, every indication is that this bear market probably has further to run as the economy comes under increasing pressure. As I wait for the evidence to drop into place, our high cash and hedged positions are now two of the most valuable assets in our portfolio as we approach that future buying opportunity, probably the best one we’ve seen in over ten years. Meanwhile, try not to get sucked into bear market rallies-use them to lighten up on positions if you’re overallocated to the stock market.

Never lose sight of the Warren Buffet quotation, “Unless you can watch your stock decline by 50 percent without becoming panic-stricken, you should not be in the stock market,” and we know that bear markets are not an unusual part of the investment process. It’s the price we pay for superior returns over the long term.

Of course, legendary investor Peter Lynch said it best: “The real key to making money in stocks is not to get scared out of them.” I’ll add, as I paraphrase well-known TV host Jim Cramer, no one ever made money in the markets by panicking.

Please be safe and stay healthy during this difficult period of time in our lives. Don’t hesitate to contact me if you have any questions or if I can be of any help.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: Investech Research

What’s Going on in the Markets March 19, 2020

What a day. What a week. What a month.

The S&P 500 index lost another 5.2% yesterday – which is somewhat of a relief because it was down over 9% at one point during the day. The index did manage to close above Tuesday’s low. That is potentially bullish. It’s somewhat funny to say, but the NASDAQ 100 (QQQ) was the best performing of the major indexes, losing just over 3%. As daily swings of 3-5% become the norm, we become somewhat numb to them. Not fun.

Although there was no direct catalyst for the sell-off Wednesday, stocks erased nearly all of Tuesday’s big gains. Energy was massacred by another big drop in crude oil prices following reports that Saudi Arabia has said it will continue record-high oil production “over the coming months,” accelerating its price war with Russia. Oil prices have been sinking as the Covid-19 pandemic reduced demand, and Russia in recent weeks failed to agree to an OPEC proposal to reduce oil production. West Texas Intermediate crude on Wednesday plunged a shocking 22.7% to trade at $21 per barrel. It is now at the lowest level since 2002! The good news? Lower prices at the pump….if you can leave your home.

Stocks found no relief from reports that the White House is urging lawmakers for $1 trillion in stimulus to cushion American workers and the economy from the impact of the coronavirus. Lawmakers were warned by the Trump administration that US unemployment could jump to 20% if no financial aid measures were passed. Lawmakers aren’t wasting time getting stimulus to the markets and taxpayers, which is good news.

With the dual plight of an oil production glut and the coronavirus global pandemic, global commerce has been left at a virtual standstill and has undercut the lives and financial balance of millions of people who work in the service industry.

I have to say, this is one of the worst times I’ve ever seen in my 30-years in the markets.  Why? Because of the velocity and relentlessness of the selling. The Financial Crisis offered many opportunities to buy in, even while the market was falling overall.  Today’s market has been a one-way street. Fifteen of the last twenty days have been down. Back-to-back up days haven’t taken place since early February. Household names that would typically be the last ones to drop, have taken big hits.

On a positive note, all of the ingredients are in place for a large, multi-day oversold bounce. I’m not trying to paint a bright picture. Indeed, it is likely to take months of choppy or declining stock prices to work through the problems that have been exposed by the action over the past three weeks. But we will find a bottom, and I’m thinking sooner than later. All of the government stimulus and federal reserve easing being put out there is going to find its way into stocks one way or another.

Even during the worst bear markets, there are always very strong “rip your face off” rallies that work off the oversold conditions. We are on the cusp of one of those rallies.

At the lows yesterday, conditions felt worse than they did on the ugly markets of Christmas Eve, 2018. They also felt a lot like they did in October 2008. Back then, the S&P lost about 1/3 of its value in just three weeks. Then it exploded almost 20% higher in one week. In this market, we could get that in a day!

Of course, that wasn’t the end of the decline. That didn’t happen until March 2009. And, there were multiple swift declines and violent oversold rallies in the months in between. So, we’re probably in for something similar for the next several months.

But, for the next few days, the market is set up for a “rip your face off” oversold bounce. We could see a 20-25% “pop” from here – which would boost the S&P 500 index back up towards 2,900 or so. A really wild move could get the index back up to 3150.

The bigger point is that yesterday certainly felt like a seller’s exhaustion. That sets us up for an oversold bounce, which could be quite substantial. Following that, we’re in for a several month-long period of big declines and big bounces as we carve out a bottom. Be ready for it if you’re overexposed to the markets and have been “losing sleep”. Use the bounces to reduce exposure or hedge your portfolios. We can help.

Whatever you do, this is not a market to chase big moves in stocks or funds. You will surely get another chance to get into this market if the rally is sustainable, so if you miss an initial move, be patient. You’ll get many chances to buy back in. You don’t need to be the first one into the foxhole.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

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